New York’s Estate Tax System Undergoes Major Overhaul

The New York Executive Budget for 2014-2015, which was signed into law earlier this week, significantly changes New York’s estate tax system effective April 1, 2014.

The changes intend to raise revenue by alleviating the tax motivations for moving to a state that does not impose estate tax, such as Florida. While the reform accomplishes this objective for many New Yorkers, it actually does the opposite for very wealthy individuals.

The new law gradually increases the amount shielded from New York estate tax from $1 million to $5.25 million over the next five years. After that, the amount shielded will be increased annually for inflation to remain in lockstep with the federal exclusion amount (currently $5.34 million). Significantly though, New Yorkers with estates exceeding 105 percent of the exclusion amount receive no protection from the New York estate tax and are subject to New York estate tax on the entire value of his or her estate.

The new law also unfavorably changes the way New York calculates the size of an individual’s estate. Under prior law, New York only imposed an estate tax on assets owned at death. Now, New Yorkers are subject to estate tax on the value of both assets owned at death and taxable gifts made within three years of death. This gift “add back” does not apply to gifts made before April 1, 2014, after January 1, 2019, or while the decedent was not a New York resident.

Noticeably absent from the new law is the ability for a taxpayer to use his or her deceased spouse’s unused New York estate tax exclusion. This concept, known as portability, has been available for federal estate tax purposes since 2011. If a couple’s estate plan is not properly structured, they could end up losing the benefit of the first spouse’s New York exclusion amount.

In addition, certain types of trusts can be structured from an income tax perspective to “reside” in a jurisdiction other than New York State and avoid New York income tax on their accumulated income. The new law requires New York State resident beneficiaries of such trusts to include distributions of accumulated income from those trusts for purposes of their personal New York State income tax effective June 1, 2014.

While these reforms provide relief to many, very wealthy New Yorkers will continue to seek new tax homes to avoid New York estate tax, and other individuals will continue to need New York estate tax planning to minimize their exposure.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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